Posted by on June 27, 2017 4:22 pm
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Categories: Bond Business central bank Crude Crude Oil Deflation Economy Inflation Macroeconomics Middle East Monetary Policy money recovery white house

Via Global Macro Monitor,

Ever have a pairs (spread) trade where both sides were moving against you?  Ouch!  Been there, don’t want to do that.   Well, this is what we call the rack trade  (Kudos to Doug Skrypek for coining the term).

Rack Trade

You can usually find these rack trades where the fast money is way offside.   Where is that today, you ask?   Long 10-year T-Notes and short crude oil.

Recall earlier this year, the fast money had record shorts in the T-Note at 2.60 percent and record longs in crude oil and $50-55 bbl..   Betting against that crowd would have made you a lot of money.

Notes and bonds are down today, which we would attribute to Mario Draghi’s comments that deflation is dead and QE is on its way out the door in Europe.

As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments — not in order to tighten the policy stance, but to keep it broadly unchanged. – Mario Draghi,  June 27

We have always held that, with exception of a few times/risks during the post crisis period, deflation, or fear of deflation, has been an urban myth and not rational.  Rents and healthcare costs, probably the two largest components of the consumer basket has skyrocketed since 2009.   The “real” real wage has probably declined more than measured thus contributing  to the punk economic growth.

The U.S. economy is far from rolling over, though it has slowed a bit,  and most of the move in the bonds has been technical — the massive short covering over the past few months and the structural shortage generated by global QE leading to a very inelastic supply curve of Treasury notes and bonds.   Traders gaming negative economic news can thus generate outsized moves in bond yields.

We love how some argue inflation expectations have come down.   Inflation expectations are measured off a distorted bond yield!  Talk about a circular logic problem.

Crude oil is moving higher today, maybe because of the White House’s bellicose announcement on Syria last night,  but we suspect short covering.   The Middle East is blowing up and Syria is probably the biggest and most dangerous quagmire we have ever seen.  Russian and U.S. fighter jets fighting for air space.  Iranians lobbing missiles into Syria.  And the U.S. keeps getting in deeper and deeper.

Always dangerous to attribute short-term moves to fundamentals as most are just noise and re-positioning of the fast money crowd.

There you have it.  The rack trade, torturing the fast money crowd today.



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